Key Takeaways
- • The Treasury plans to take reserve powers in the forthcoming Pension Schemes Bill to set "binding asset allocation targets", effectively mandating that pension schemes commit a portion of portfolios to private markets.
- • The policy follows the Mansion House Accord, in which 17 large defined contribution pension providers voluntarily agreed to allocate at least 10% of assets to private markets by 2030.
- • According to brokers Stifel, private equity exit activity has fallen from 20-25% of net asset value per year to under 10%, weakening the case for forced allocations.
- • Blake Anthony Reddy, co-founder and principal adviser at K2 Private Wealth, argues that state-directed allocation undermines fiduciary duty and sets a precedent for using retirement savings to meet political objectives.
- • Reddy contends that pension reform should focus on contribution rates, simplified pension rules and transparency rather than mandated private market exposure.
Summary
The UK government plans to compel pension funds to invest more heavily in private equity and infrastructure, a move it presents as a driver of economic growth. In the forthcoming Pension Schemes Bill, the Treasury will take reserve powers to set "binding asset allocation targets," which would require schemes to commit part of their portfolios to private markets. The proposal builds on the Mansion House Accord, under which 17 large defined contribution (DC) providers voluntarily agreed to allocate at least 10% of assets to private markets by 2030. Commentary in Money Marketing by Blake Anthony Reddy, co-founder and principal adviser at K2 Private Wealth, argues that the tone has shifted from voluntary participation to coercion.
Reddy's central objection rests on fiduciary duty, the principle that trustees and managers must act solely in members' best interests. He argues that by setting mandatory allocations the state is assuming a role traditionally held by investment professionals. He also questions the timing, citing brokers Stifel's analysis that typical private equity exit activity has dropped from 20-25% of net asset value per year to under 10%. In a higher-rate environment, he notes, valuations are under pressure, buyers are cautious and liquidity is constrained. Pension savers could therefore bear the burden of assets bought at pre-crisis prices with limited exit routes. Reddy also points to higher fees, limited transparency and valuation challenges in private equity and infrastructure, and questions whether the illiquidity premium will materialise under current conditions.
Reddy warns that the policy sets a dangerous precedent, asking whether a 10% private markets target today could become a 20% infrastructure or 15% green energy target tomorrow. He argues this would erode the market-based discipline trustees use to balance risk and return. He also highlights an inconsistency with two decades of UK pension de-risking, during which defined benefit schemes reduced equity exposure and matched liabilities with bonds. Reddy acknowledges that private equity can play a role in diversified portfolios, but argues that such decisions should rest with professional managers rather than Whitehall. He recommends increasing contribution rates, simplifying pension rules and incentivising transparency, concluding that investors should be allowed to choose to support British businesses rather than being forced to do so.
Reddy's central objection rests on fiduciary duty, the principle that trustees and managers must act solely in members' best interests. He argues that by setting mandatory allocations the state is assuming a role traditionally held by investment professionals. He also questions the timing, citing brokers Stifel's analysis that typical private equity exit activity has dropped from 20-25% of net asset value per year to under 10%. In a higher-rate environment, he notes, valuations are under pressure, buyers are cautious and liquidity is constrained. Pension savers could therefore bear the burden of assets bought at pre-crisis prices with limited exit routes. Reddy also points to higher fees, limited transparency and valuation challenges in private equity and infrastructure, and questions whether the illiquidity premium will materialise under current conditions.
Reddy warns that the policy sets a dangerous precedent, asking whether a 10% private markets target today could become a 20% infrastructure or 15% green energy target tomorrow. He argues this would erode the market-based discipline trustees use to balance risk and return. He also highlights an inconsistency with two decades of UK pension de-risking, during which defined benefit schemes reduced equity exposure and matched liabilities with bonds. Reddy acknowledges that private equity can play a role in diversified portfolios, but argues that such decisions should rest with professional managers rather than Whitehall. He recommends increasing contribution rates, simplifying pension rules and incentivising transparency, concluding that investors should be allowed to choose to support British businesses rather than being forced to do so.
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